Russian Venture Capital
Market Overview
2Q2013
Contents
2
Introduction 3
About Rye, Man & Gor Securities 4
Russia’s venture capital market: the 2-minute tour 5
VC market...
Dear friends,
We are pleased to present the first issue of the Russian Venture Capital Market Overview by Rye, Man &
Gor S...
About Rye, Man & Gor Securities
Rye, Man and Gor Securities (RMG) is an independent Russian investment company. RMG has
be...
$87M Privatefunds
$44.9m
Public funds
$15.3m
eCommerce
$31.4m
Biotech
$6.3m
Other IT
$36.8m
Industrial tech
$5.2m
Mobile a...
* Including deals with undisclosed values
VC market: overview
98
167
336
135 149
87
100
89
87
100
75
53
0
20
40
60
80
100
...
The q-o-q decrease in the number of deals closed in
2Q2013 was mainly due to a sharp decline in
venture financing for seed...
VC market: sectors
IT remains the most fertile soil for venture projects.
In 2Q2013, some 87% of all venture capital in
Ru...
VC market: investors
0 10 20 30 40 50
PPP
Private funds
Public funds
Corporate funds
Business angels
Venture capital inves...
Deal focus
Company Description Sector Investor Deal
date
Deal
value
Stage Comments
B2B-Center Largest e-auction
marketplac...
Deal focus
Company Description Sector Investor Deal
date
Deal
value
Stage Comments
Esky Children’s
products e-store
eComme...
Methodology
This report is based on data provided by Rusbase,
Venture Database, Russian Venture Company and
Skolkovo Found...
Cloud solutions
13
2 Cloud technology enables businesses to access inexpensive scalable IT resources without
incurring inf...
Cloud solutions: market
In 2013, experts have no doubt that cloud
technologies will set the pace for the whole of
the glob...
Cloud solutions: categories
15
The cloud tech market is usually divided into three
major segments: infrastructure-as-a-ser...
Estimates of Russia’s IaaS market size vary widely,
with Orange Business Services forecasting annual
growth by 42.3% from ...
The software-as-a-service (SaaS) market is the
most mature of all cloud tech markets globally.
According to Gartner, SaaS ...
Cloud CRM/ERP/SCM: market
18
Global market: traditional business solutions under a cloud
According to Gartner, SaaS soluti...
Cloud CRM/ERP/SCM: market
19
Russian market: reaching for the clouds
Cloud solutions (particularly SaaS) are gaining
groun...
Cloud CRM/ERP/SCM
20
The next steps towards automation are usually
made in the fields of CRM/ERP/SCM and
task/project mana...
The company held an IPO on the NYSE in 2004,
selling 10% of its equity for $110m. In September
2008, Salesforce stocks wer...
Net Suite Inc., founded in 1998, is one of the
world’s leading developers of cloud solutions for
business automation. The ...
Cloud CRM/ERP/SCM: solutions
In this chapter, we will take a closer a look at cloud
CRM/ERP/SCM providers operating on the...
Megaplan offers cloud solutions for customer
relations, sales, staff collaboration and accounting.
Megaplan won Russia’s S...
2100
4000
6000
2011 2012 2013E
Revenues, $ thousand
The company’s 12-month revenue as of the end of
June 2013 was $5m. Meg...
Cloud CRM/ERP/SCM: solutions
MoySklad (“MyWarehouse”) is a cloud solution for
sales and inventory management. Its function...
25000
64000
1500
3700
0
1000
2000
3000
4000
0
20000
40000
60000
80000
2011 2012
Revenue and number of customers
Revenue, R...
125 500
900
0
500
1000
2011 2012 2013E
Revenue, $ thousand
amoCRM is a cloud CRM solution with functionality
for creation ...
200
1 000
2 800
2010 2011 2013E
Revenue, $ thousand
Moe Delo (“My Business”) is an online accounting
solution with some CR...
Miiix helps online stores to obtain information on
their suppliers’ warehouse reserves and prices.
The service, launched i...
Growth in the number of online stores operating in
Russia will be an obvious driver for growth of Miiix
business.
Miiix ex...
BigBird is a cloud system for management of sales
and inventory with functionality covering:
 Sales, purchases and invent...
Cloud CRM/ERP/SCM: solutions
Future plans
According to Oleg and Igor, development priorities
include integration with othe...
Conclusion
Venture capital market in 2Q2013
 The amount of venture capital invested in Russia in 2Q2013 fell by 41.3% q-o...
Acknowledgements
We would like to thank the experts, creators of M&A databases and venture entrepreneurs, who have
contrib...
Contact information
We are greatly interested in the opinion of our readers, so if you are an investor, a venture
entrepre...
Any information and opinions contained in this analytical document (hereinafter – the “Analytical Materials”) are publishe...
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RMG Russian Venture Capital Market Overview 2Q2013

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Rye, Man & Gor Securities is pleased to present the first issue of the Russian Venture Capital Market Overview, which includes a rundown of Russia’s venture capital market and an industry focus dedicated to the cloud technology market.

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  1. 1. Russian Venture Capital Market Overview 2Q2013
  2. 2. Contents 2 Introduction 3 About Rye, Man & Gor Securities 4 Russia’s venture capital market: the 2-minute tour 5 VC market overview 6 Deal focus 10 Methodology 12 Cloud solutions 13 Cloud CRM/ERP/SCM 18 Megaplan 24 MoySklad 26 amoCRM 28 Moe Delo 29 Miiix 30 BigBird 32 Conclusion 34 Acknowledgements 35 Contact information 36
  3. 3. Dear friends, We are pleased to present the first issue of the Russian Venture Capital Market Overview by Rye, Man & Gor Securities. This first Report includes a rundown of Russia’s venture capital market for 2Q2013 and an industry focus, in which we provide a detailed overview of the cloud technology market. The primary goal of our project is to make Russia’s innovative sector more alluring for both foreign and domestic investors and increase the efficiency of contacts between investors and innovative companies seeking financing. In our opinion, the main barrier to growth of Russia’s venture capital market is the lack of objective information. Foreign and domestic investors do not have sufficient reliable data and analytical materials on innovative markets and projects in Russia. This slows down the search for investment targets, makes investment decisions more difficult, increases costs for project analysis and due diligence, and restricts the size of the pool of potential venture investors. We hope that our analytics will help bridge some information gaps in Russia’s venture capital market, make it more transparent, and give investors a better idea of innovative markets and projects.
  4. 4. About Rye, Man & Gor Securities Rye, Man and Gor Securities (RMG) is an independent Russian investment company. RMG has been on the market for 20 years, in which time it has earned an excellent reputation among both clients and peers as a reliable partner. RMG provides a wide range of services to Russian and foreign clients in the venture capital market, including: • search for promising target assets; • capital raising through public or private offerings; • search for strategic investors and M&A deal support; • venture project support, including strategy development and measures to increase capital- raising potential; • advisory on deal structuring and financing, deal processing, negotiations, and target company due diligence. Rye, Man and Gor Securities is a member of M&A Worldwide, a cross-border M&A boutique network, and of the National Alternative Investment Management Association. 4
  5. 5. $87M Privatefunds $44.9m Public funds $15.3m eCommerce $31.4m Biotech $6.3m Other IT $36.8m Industrial tech $5.2m Mobile apps $3.8m Cloud tech $3.8m $1.9m $1.6m 2012 2Q2013 Average deal value Seed 29 Startup 16 Growth 5 Expansion 3 $149m $87m 1Q2013 2Q2013 Capital invested -44.1% Russia’s venture capital market: the 2-minute tour PPP $13.9m Business angels $11.5m Corporatefunds $1.6m 53 75 53 1Q2013 2Q2013 Deals closed -29.3% 2Q2013 * Excluding deals over $100m (see Methodology) * ImagebyIconBeast-http://www.iconbeast.com/
  6. 6. * Including deals with undisclosed values VC market: overview 98 167 336 135 149 87 100 89 87 100 75 53 0 20 40 60 80 100 120 0 100 200 300 400 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 Russian venture capital deal flow Capital invested, $ million Deals closed According to our estimates, venture capital invested in Russia in 2Q2013 totaled $87m, down by 41.3% q-o-q and by 47.7% y-o-y. The number of deals closed fell to 53.* Both total capital invested and deals closed were at 6-quarter lows. Russia’s negative trend in venture capital invested and deal numbers matches global slowing of economic growth in 1H2013, and a slight contraction of VC markets was also registered in Europe and the US. But a number of other specific factors played a role in the Russian VC downturn. Most importantly, transparency is not a characteristic feature of the Russian VC market, so that closed deals are often announced only after several months. Also, the parties often prefer not to disclose details, and expert estimates may vary substantially. For these reasons, the actual decrease in VC investments in 2Q2013 may not be as substantial as our estimate suggests. It should be noted that, for the purposes of this report, total capital invested does not include deals over $100m, exit deals (see table) and investments in venture infrastructure (e.g. funds or accelerators). 6 VC investments are stagnating Sources: Rusbase, Venture Database, RMG Company Investor Deal value Sector Exits B2B-Center Elbrus Capital $52m eCommerce Zephyr Solutions Cloud4Auto n/a IT Large deals Lamoda Access Industries, Summit Partners, Tengelmann $130m eCommerce Sources: Rusbase, Venture Database, RMG Large deals and exits, 2Q2013
  7. 7. The q-o-q decrease in the number of deals closed in 2Q2013 was mainly due to a sharp decline in venture financing for seed stage companies. There was only a slight drop in the number of non-seed companies financed (from 30 in 1Q to 24 in 2Q), whereas only 29 companies currently at the seed stage closed VC rounds, compared to 45 in 1Q. Interestingly, the seed slump did not affect the amount of capital invested in seed companies. On the contrary, total investments into seed companies grew by 9.3% q-o-q to $17.2m. It is worth noticing that seed companies have received less capital from private and joint funds in 2013 than in 2012. Private funds only invested 13.1% of all venture capital in 2Q2013, whereas their contribution averaged 34% in 2012 and reached 44.7% in 4Q2012. A similar trend is evident in startup investments, which implies that young companies are having to rely on state-backed institutions for early-stage financing. Numbers of growth-and-expansion VC deals are much lower than seed and start-up (just 8 in 1Q2013 and as many in 2Q), suggesting that Russian venture projects find it much harder to finance further growth and expansion on VC markets. However, although there were only a few growth and expansion deals, they accounted for 53% of all venture capital invested in 2Q2013. 0 10 20 30 40 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 Private funds cut seed investments in 2013 Business angels Corporate funds Public funds Private funds PPP Investments at seed stage by investor type, $ million Number of deals at the seed stage fell sharply VC market: stages 73 10 3 3 51 26 7 3 69 27 3 1 45 22 7 1 29 16 5 3 0 20 40 60 80 Seed Startup Growth Expansion VC deal flow by stage 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 Sources: Rusbase, Venture Database, RMG 7 Sources: Rusbase, Venture Database, RMG
  8. 8. VC market: sectors IT remains the most fertile soil for venture projects. In 2Q2013, some 87% of all venture capital in Russia was invested in IT firms (eCommerce, Cloud, Mobile apps and others). Total investments in industrial tech and biotech over the last 5 quarters have been just 11% of total venture capital invested. It is interesting to note a certain degree of sector specialization: while IT venture projects are mostly financed by private and corporate funds, up to 90% of investments in industrial tech and biotech firms come from state-funded institutions. Dmitry Galperin, Investment Director at Runa Capital, a Russian VC firm, told us that industrial tech and biotech sectors are riskier than IT since they need more investments and time to market. Also, promising projects are more numerous in IT than in biotech or industrial tech due to software development expertise in Russia, and enthusiasm for IT is supported by success stories from the US and Europe. eCommerce is the most popular IT subsector, with a 41.8% share of total venture capital invested over the last 4 quarters. As much as 81.2% of all venture capital invested went to eCommerce companies in 2Q2012 thanks to two large deals: Avito.ru, an online classifieds site ($75m), and KupiVIP, a shopping club ($38m). For comparison, the biggest deal closed in the eCommerce subsector in 2Q2013 was only worth $10m: Media Capital, a VC firm created in 2012, purchased a minority stake in a domestic appliances e-store, Holodilnik.ru. The share of venture capital invested in cloud tech companies went sharply up to 4.3% in 2Q from just 0.8% in 1Q, but investment in mobile apps plunged from $41.3m (27.8% of total VC invested) in 1Q to $3.8m (4.4%) in 2Q. The average VC deal value was $1.65m in 2Q2013, which is slightly less than in 1Q ($1.98m) and in 2012 ($1.96m). 1,9 3,9 1,4 2,0 1,6 0 1 2 3 4 5 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 Average VC deal values, $ million 8 2Q2013 1Q2013 4Q2012 3Q2012 2Q2012 0% 20% 40% 60% 80% 100% Sector shares in VC investment eCommerce Cloud tech Mobile apps Other IT Biotech Industrial tech IT still reigns supreme Sources: Rusbase, Venture Database, RMG Sources: Rusbase, Venture Database, RMG
  9. 9. VC market: investors 0 10 20 30 40 50 PPP Private funds Public funds Corporate funds Business angels Venture capital invested in 2Q2013 by sector and investor type, $ million eCommerce Cloud tech Mobile apps Other IT Biotech Industrial tech 9 Private funds are the most generous investors 0 10 20 30 40 50 Business angels Corporate funds Public funds Private funds PPP Seed stage financing: state-backed VC funds are the only option Seed Startup Growth Expansion * According to PwC/NVCA MoneyTree™ Report based on Thomson Reuters data Another distinctive feature of Russia’s venture capital market is the extremely small role of corporate VC funds. They were responsible for just 1.8% of total capital invested in 2Q2013, up slightly from 1.5% in 2012. By contrast, corporate VC funds contributed from 6.8% to 9.1% of all venture capital invested in the US in each of the last 10 years.* Sources: Rusbase, Venture Database, RMG Sources: Rusbase, Venture Database, RMG In 2Q2013, private VC firms invested $44.9m (51.5% of total VC) in 16 projects, which makes them the most active investors in the Russian market. So private funds have retained leadership, although both the amount they invested and number of deals they closed almost halved q-o-q: in 1Q, private VC firms invested $88.5 in 32 projects. Interestingly, investors in the Russian VC market seem to be sector-specialized. In 2Q2013, only private VC firms and business angels invested in eCommerce, while biotech companies received all their financing from public VC institutions. This may reflect the fact that private VC firms are generally less involved in early-stage deals (most venture projects in biotech and industrial tech are still at seed stages). Also, unlike biotech and industrial tech, IT offers private funds attractive “copycat” projects based on ideas already successfully implemented in Europe or the US. Venture capital invested in 2Q2013, $ million
  10. 10. Deal focus Company Description Sector Investor Deal date Deal value Stage Comments B2B-Center Largest e-auction marketplace in Russia eCommerce Elbrus Capital Fund II 04/13 $52m. Expansion Elbrus Capital purchased 23% of company equity: one part from Mail.ru Group (15%), which completely exited, and the remainder from co-founder Alexander Boyko (8%). Game Insight Mobile games developer Mobile apps IMI.VC 02/13 $25m Growth The company had already received financing from IMI.VC in 2011 and 2012. A large deal became possible thanks to a $75m investment in the fund by Mikhail Vinchel. Ostrovok Online hotel booking site eCommerce Yuri Milner and co-investors 03/13 $25m Expansion Another round of financing may have been triggered in response to rival Oktogo.ru raising funds two weeks before (see below). Ostrovok cut staff by a third shortly after the round in order to focus on core projects. Oktogo Online hotel booking site eCommerce Victor Sazhin Group and co- investors 03/13 $11m Growth The financing was raised to strengthen the brand and expand in Russian regions. The company expects to close another round of financing in 2013. WebMediaGroup A holding company owning Dostavka.ru, Zoomby.ru, Menu.ru, Bank.ru etc. Other IT Gazprombank, Leader- innovations, Sergey Kalugin 05/13 $10m Growth The company received $6m from Gazprombank and Leader-innovations in 2011. A major chunk of the funds raised will be spent on expansion of Zoomby.ru, a video hosting site. Holodilnik.ru Home appliances online store eCommerce Media Capital 04/13 $10m Expansion First media-for-equity deal in Russia: Media Capital will conduct a major advertising campaign for the e-store in exchange for a minority stake. uBank Mobile payments service Mobile apps Runa Capital 02/13 $8m Startup Runa Capital’s largest deal. uBank needed funds to finance the development of new mobile payments technology and the launch of a new product. 10
  11. 11. Deal focus Company Description Sector Investor Deal date Deal value Stage Comments Esky Children’s products e-store eCommerce ru-Net II 03/13 $6m Growth The deal was based on a valuation of $24m. The ru- Net II fund fully owns Ivi.ru, a video hosting service, and holds stakes at IConText, an online advertising agency, Ozon.ru, an online store, and Biglion, a discount service. Travelata Travel booking service eCommerce Invia, MCI Management 06/13 $5m Growth Poland-based MCI Management invested $500,000 in Travelata in 2012.. Integrator Interactive ad management and media planning tool Other IT/Advertising Bulvarnyoe Koltso 02/13 $5m Startup Bulvarnoye Koltso has exclusive advertising rights on Moscow public transport. Tartis-Aging Anti-aging technology development Biotech Skolkovo foundation 02/13 $5m Startup The company is included in the portfolio of Bioprocess Capital Ventures, a VC fund of the state-backed Russian Venture Company. The grant will be used to start clinical tests of the anti-aging product. Garpun Contextual and targeted ad management system Other IT/Advertising iTech Capital 04/13 $3,5m Startup Tech Capital fund has already invested in a similar project designed for smaller clients. Garpun is an investment aimed at the mid- market sector. YaKlass School education portal Other IT/Education Data Pro Group, Nikita Khalyavin, Vesna Investment 05/13 $2m Startup Nikita Khalyavin is the founder of Professionali.ru and Shopogoliq.ru. YaKlass is planning to launch its educational services on English- and Spanish- speaking markets. 11
  12. 12. Methodology This report is based on data provided by Rusbase, Venture Database, Russian Venture Company and Skolkovo Foundation, processed and aggregated by RMG. Only venture capital investments and grants by business angels, corporations, corporate VC funds, private VC firms and public VC institutions not exceeding $100m in one round were included in the venture capital market analysis. For the purposes of this report, the term “venture capital investments” stands for equity investments in new or growing companies which operate in the IT, industrial technology or bio technology fields. We only included companies with main business in Russia in the total venture capital market volume. We did not include financing received from Russia- based investors by companies oriented to foreign markets. We also included grant financing in the total VC market size. Although grants are essentially a non- repayable subsidy for research and development, they were included in the total capital invested since they are allocated on a competitive basis. Exits and investments in market infrastructure were not included in the total VC market size. The term “investments in market infrastructure” stands for investments in VC funds, business accelerators, tech parks and other institutions which operate on the VC market but are not venture projects. The term “exit” refers to a VC deal in which one or more investors exit a company’s equity. We distinguish between 4 stages of venture project life: 1. Seed: a project only exists on paper or as an idea. 2. Startup: a company that is being set up or has had operations for a short period of time without any commercial sales. 3. Growth: a new product has been launched and first commercial revenues have been registered. 4. Expansion: revenues, market share, output, office area, etc. are growing This report distinguishes between three venture project sectors: IT, industrial tech and biotech. The information technology (IT) sector consists of the following subsectors: eCommerce (including travel booking sites), cloud technologies, mobile apps, and other IT (IT companies not otherwise specified, including telecoms, advertising technologies, media projects, Internet media, search and recommendation sites, etc.). The industrial technology sector includes companies designing equipment and technologies for industrial use, including energy efficient and clean equipment and technologies. The biotech sector includes companies designing medical equipment, medicines, and innovative medical services and technologies. We do not further divide biotech and industrial tech into subsectors due to the low volume of VC investments in these sectors in Russia. 12
  13. 13. Cloud solutions 13 2 Cloud technology enables businesses to access inexpensive scalable IT resources without incurring infrastructure costs 3 Russia’s cloud tech market is dominated by Infrastructure-as-a-Service (IaaS) solutions. But this segment is characterized by high entry barriers that make it unsuitable for venture projects 4 The Software-as-a-Service (SaaS) segment has a slightly smaller share of the cloud market than IaaS, but SaaS it is a much more suitable segment for venture projects 5 SaaS competes successfully with traditional software in providing solutions for businesses, and the cloud tech penetration rate is highest in the CRM sub-segment 6 Most Russian venture SaaS projects target SMEs that have never used automation systems before, so they are competing with Microsoft Excel rather than out-of-a-box software 7 There are numerous SaaS products in the Russian market, but solutions that integrate various cloud systems within a single framework (cloud brokers) are only just arriving and represent the most promising market niche 1 Cloud is the future of IT. The global cloud tech market is growing much faster than the IT market as a whole In this chapter, we present a review of Russia’s cloud technology venture market. We believe that cloud is the most promising area within IT and recommend investors to take a closer look at it. American and European cloud providers have already shown the potential of this sector, and their Russian peers should also fare well, since Russian IT specialists have strong software development expertise that makes their products competitive both domestically and globally. It should be noted that this review only deals with venture projects in the cloud technology sector and does not claim to offer a comprehensive overview of the Russian cloud market. Review of the cloud technology venture market
  14. 14. Cloud solutions: market In 2013, experts have no doubt that cloud technologies will set the pace for the whole of the global IT sector in the near future. The cloud tech market is growing faster than other IT: according to Gartner, the public cloud market will grow by 18.5% y-o-y this year, whereas IT as a whole will see 4.1% growth. The significance of cloud computing is comparable to the arrival of the first PCs some 30 years ago, since it offers both large enterprises and SMEs access to practically unlimited and easily scalable IT resources. 14 Scalable • Users can rapidly change the amount of available resources without any penalties or limitations Multi-tenant • Numerous users can access the service simultaneously while retaining security and privacy Pay-as-you-go • Payment depends on actual use Abstract • Users do not and need not know about the actual location of data and infrastructure Cloud solutions 110 131 155 181 210 0 100 200 300 2012 2013 2014 2015 2016 Global cloud tech market size, $ billion Gartner forecasts that the global cloud tech market will grow by an average of 17.5% a year in 2013- 2016 and reach $210b. But Gartner includes all internet advertising in the cloud technologies market. Other consultancies, which leave out internet advertising, offer much lower forecasts. Forrester expects the cloud tech market to expand from $40b in 2012 to $100b in 2016, while IDC estimates are $41b and $114b, respectively. Orange Business Services estimate Russia’s cloud market size at R4.5b ($145m) in 2012 and expect it to expand at 44.1% CAGR to R19b ($612m at the 2012 average exchange rate) by 2016. Advantages of cloud solutions New opportunities for business Cloud technologies help businesses reduce costs and give them access to IT solutions which were previously the exclusive preserve of large corporations. Parallels estimated the cloud services market for Russian SMEs at $466m in 2012, including spending on hosting and internet advertising. The report by Parallels points out that the market will be driven by growth of broadband access in Russian regions and growing cloud awareness among Russian SMEs: 47% of SMEs which currently do not use cloud solutions say that they will start using them within 3 years. Source: Gartner
  15. 15. Cloud solutions: categories 15 The cloud tech market is usually divided into three major segments: infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS). Cloud services can be divided between the three depending on the extent to which they are under the control of the user (see the figure below). According to IDC, IaaS dominated the Russian public cloud market in 2011 with a share of 49.6%, closely followed by SaaS (46.8%). PaaS trailed behind with a mere 3.6%, but Orange Business Services expect PaaS in Russia to grow fastest of the three: by 70.1% per year in the next 4 years. IaaS, PaaS, SaaS: from control to convenience SaaS Applications PaaS Operating system Development environment Applications deployment IaaS Servers Data storage Network components Provider-managedUser-managed IaaS makes it unnecessary for the user to install, support and update their own infrastructure PaaS providers offer a cloud environment for the development of applications SaaS solutions are applications located on the provider’s infrastructure and need not be installed on the user’s machines Specific features of each category make them more or less attractive for venture capital. IaaS is by and large a market for heavyweights since it requires substantial investments in the installation and support of infrastructure. The global IaaS market is dominated by giants such as Amazon Web Services, Terremark (a subsidiary of Verizon), IBM, and AT&T. In Russia the category is still emerging and remains immature, but it is dominated by relatively large players such as CROC, I-Teco, and Parking.ru. Orange Business Services estimate Russia’s IaaS market at R3.4b ($110m) in 2013 and forecast it to grow at a CAGR of 42.3% to R9.8b ($317m) in 2016. Global demand for PaaS solutions is only just taking off, but PaaS offer major advantages to developers. According to Parallels, global PaaS sales in 2013 will reach $1.5b, doubling by 2015. PaaS is the youngest and least mature category of cloud technologies, occupying only a marginal share of both Russian and global cloud markets. Specialized niche solutions by small providers compete against PaaS products offered by behemoths like Google, Microsoft and Salesforce.com. Mikhail Oreshin, co-founder of the Russian Cloud Computing Professional Association, told us that the Russian PaaS market is too shallow for small players, so that global market orientation is the only promising option for Russian PaaS projects.
  16. 16. Estimates of Russia’s IaaS market size vary widely, with Orange Business Services forecasting annual growth by 42.3% from $81m in 2012, and a 2012 report by J’son & Partners predicting an 11.3% growth rate from $32m in 2012. Both estimates suggest a very modest role for Russia in global terms, since, according to Gartner, the global IaaS market will grow from $6b to $24b in 2012-2016. J’son & Partners attribute 76% of Russian IaaS sales in 2011 to the three largest players: CROC, I- Teco and Parking.ru. Microsoft also entered the Russian market in 2013. Since the entry barrier is much higher in IaaS than in PaaS or SaaS, there are only a few IaaS venture projects. IaaS & PaaS 81 110 158 226 317 32 52 71 84 90 0 100 200 300 400 2012 2013 2014 2015 2016 Estimates of Russia’s IaaS market size, 2012-2016, $ million Orange Business Services J'son & Partners 16 Sources: Orange Business Services, J’son & Partners, RMG estimates 43% 23% 10% 3% 3% 18% IaaS market shares in Russia, 2011 CROC I-Teco Parking.ru Clodo Oversun Others PaaS is an emerging and, according to experts, the most promising cloud tech category. The main target audience for PaaS products are web developers. Globally, the most successful model combines PaaS solutions with corresponding IaaS and SaaS products. This model is used by Amazon Web Services, the leader of the PaaS market. The two main PaaS contenders globally are Microsoft and Salesforce.com. Technavio recently published an analytical report estimating the 2012 global PaaS market at $1.3b and forecasting its growth by 49% a year to $6.45b by 2016. Russia’s PaaS market is very narrow at present, but Orange Business Services expect it to grow by 70% a year in the next 4-5 years. At present, there are only a handful of successful PaaS solutions “made in Russia”. The most notable is Jelastic, a platform for Java and PHP development, which won the Technology Leader Awards from Oracle in 2012. The platform competes against solutions backed by Microsoft and VMware, citing no vendor lock-in and global reach as its advantages. IaaS: no place for small players PaaS: ready, steady, grow Source: J’son & Partners
  17. 17. The software-as-a-service (SaaS) market is the most mature of all cloud tech markets globally. According to Gartner, SaaS sales were $16b in 2012 (more than PaaS or IaaS) and will grow at CAGR of 19.5%. These figures only include public cloud solutions for enterprises. Unlike IaaS and PaaS, the SaaS model is characterized by a great diversity of products, with solutions available for automation of practically any business process, from project collaboration to enterprise resource planning. As mentioned above, automation only became an option for most small and medium enterprises recently, with the advent of cloud technologies, so there is plenty of space in the market for new cloud solutions. This view is confirmed by Gartner, which found that cloud tech penetration in business process automation is still only 20%. SaaS 16 20 24 28 33 0 10 20 30 40 2012 2013 2014 2015 2016 Global SaaS market size, $ billion 17 Source: Gartner SaaS: rich potential 45 68 103 158 232 0 50 100 150 200 250 2012 2013 2014 2015 2016 SaaS market in Russia, $ million Source: Orange Business Services The SaaS market has only just taken shape in Russia and Orange Business Services expect it to grow at an average of 50% annually for the next 3-4 years. While SaaS dominates the global cloud tech market, in Russia it trails behind IaaS. Analysts do not expect this situation to change any time soon: Russian SMEs are only testing SaaS waters, so their cloud tech awareness and trust levels are far short of global trends. But experts point out that this is changing. We have chosen SaaS-based CRM/ERP/SCM solutions for detailed analysis. We see plenty of promising venture projects in this field that promise to become new niche leaders on the growing Russian market. Our approach is supported by Gartner figures, which show that cloud tech makes particularly rapid progress in the CRM/ERP/SCM segment worldwide.
  18. 18. Cloud CRM/ERP/SCM: market 18 Global market: traditional business solutions under a cloud According to Gartner, SaaS solutions accounted for 35% of all Customer Relations Management (CRM) services in 2011, whereas 48% of CRM applications will be cloud-based by 2016. Gartner forecasts the SaaS penetration rate in the Supply Chain Management (SCM) and Enterprise Resource Planning (ERP) segments to reach 28% and 17% by 2016, respectively. So cloud tech already represents serious competition for traditional business solutions and is bound to take more of their market in the future. Gartner estimates the global CRM/ERP/SCM market at $56b in 2013 and expects it to reach $84.5b by 2017. Based on these data, we estimate the size of the global cloud CRM/ERP/SCM market in 2012 at $11b, with CAGR of 21.7%. 0% 10% 20% 30% 40% 50% 60% 2011 2012 2013 2014 2015 2016 SaaS penetration rate CRM SCM ERP Source: Gartner 11,0 13,8 16,7 20,0 24,1 0 5 10 15 20 25 30 2012 2013 2014 2015 2016 Worldwide cloud CRM/ERP/SCM market, 2012-2016, $ million SCM ERP CRM Sources: Gartner, RMG estimates In a survey by Gartner in 2012, respondents cited lower total costs of ownership, faster and cheaper deployment, and lower capex among the main reasons for using SaaS rather than traditional non-cloud solutions. When asked why they hold back from cloud, CRM/ERP/SCM respondents cited uncertainty whether cloud would address their needs, satisfaction with existing on- premise applications, no further requirements, and being locked into their current solution with expensive contractual requirements. Current trends and attitudes of business support the expert view that cloud-based business applications are likely to dominate the market. We believe that this trend is more articulate in the small and medium business sector than for large enterprises.
  19. 19. Cloud CRM/ERP/SCM: market 19 Russian market: reaching for the clouds Cloud solutions (particularly SaaS) are gaining ground fast in Russia, but estimates of the current state of play differ widely. In a recent study, Parallels estimated the Russian cloud market for SMEs at $174m, including CRM/ERP/SCM systems as well as cloud file sharing, accounting, collaboration, and phone and web conferencing services (the share of CRM/ERP/SCM applications in the forecast is not specified). According to Parallels, the market will grow by CAGR of 29% to $377m by 2015. However, Mikhail Smolyanov, CEO at Megaplan, a leading Russian provider of SaaS- based CRM and task management solutions, believes that Russia’s cloud CRM/ERP/SCM applications market is not worth more than $30m at present, although his estimate only includes on- demand (public) SaaS sales. Description and assessment of the present state of Russia’s cloud-based applications market is particularly difficult because CRM, ERP and SCM are still very young sciences for most Russian SMEs, which often fail to distinguish between the three and between the corresponding cloud solutions. In most cases SME needs, and therefore the functionality of most SaaS solutions, cannot be classified as pure CRM, ERP or SCM, primarily because users themselves do not think within this framework. We have therefore taken the liberty of merging these three traditional segments into one for the purposes of the present report. An important point to remember for understanding the Russian market is that, whereas large (and some medium-sized) businesses were able to introduce traditional business process automation solutions before the arrival of cloud technologies, automation has only become affordable for most SMEs thanks to cloud-based products. This distinctive feature has two important implications. Firstly, market participants point out that needs of companies for business process automation are strongly prioritized: accounting is usually the first function to be automated as it is compulsory for all businesses to keep accounts and report to fiscal authorities. So the economic gain of a cloud-based solution in this sphere is felt as soon as it is adopted. 174 225 291 377 0 100 200 300 400 2012 2013 2014 2015 SaaS-based business applications market in Russia, $ million Sources: Parallels, RMG estimates – The current potential market for cloud CRM systems for SMEs is about $120 million. But it is only less than 10% saturated now Vladimir Gabriel, Head of sales at Delovaya Sreda
  20. 20. Cloud CRM/ERP/SCM 20 The next steps towards automation are usually made in the fields of CRM/ERP/SCM and task/project management. But not all Russian SMEs make these next steps. Mikhail Smolyanov believes that SaaS penetration rates are low mainly because Russian businesses are insufficiently aware of the gains, which automation offers. A survey by Parallels in 2012 found that only 5% of SMEs surveyed were using a cloud-based CRM or ERP solution, while a modest 11% of them were planning to adopt a cloud solution for these tasks within 3 years. Limited availability of broadband connection in Russian regions may explain some of this “technophobia”. Secondly, due to market immaturity, cloud-based CRM/ERP/SCM products compete against Microsoft Excel and sometimes even pen-and- paper ledgers rather than against each other. SMEs are not well-aware of the availability and advantages of cloud solutions for business, so any marketing activity to promote a particular cloud- based product promotes the idea of SaaS in general, serving the interests of rival companies as well as those of the advertiser. Overall, despite the challenges, Russia’s cloud CRM/ERP/SCM market has good prospects and may grow at a CAGR of 50-70% in the next 4-5 years. Experts point out that awareness of cloud- based business applications, however low, is on a strong uptrend, both among SMEs and large companies. At present, large and most medium- sized enterprises tend to use SaaS-based CRM/ERP/SCM solutions within the confines of small company departments and sub-sections, but SaaS providers have noted a positive shift in attitude towards cloud tech. We see the greatest potential in integration of various cloud-based SaaS automation products and also in the development of industry-specific “niche” CRM/ERP solutions. – We used to have to explain what a cloud was, where data were stored and how they were protected. Now clients are better prepared: we have been receiving explicit requests for SaaS solutions Alexey Fitiskin, Head of sales at ASoft – The concept of a cloud broker, which has existed in the West for some time now, is still virtually inexistent in Russia. This is where I see a point of growth Mikhail Oreshin, co-founder of Russian Cloud Computing Professional Association Accounting CRM/ERP/SCM Task/project management Business process automation priorities
  21. 21. The company held an IPO on the NYSE in 2004, selling 10% of its equity for $110m. In September 2008, Salesforce stocks were included in the S&P 500 index. The company’s market cap grew by 1650% from January 31, 2005 to January 31, 2013. Net losses in 2012-2013 after years of profits were not due to a negative business trend, but reflect income tax provisions of $142.7m, growth of goodwill amortization by $88m and non-cash costs of $379.4m in an option programme. Salesforce has generated consistently positive cash flows. In FY2013, the company registered free cash flow of $557m. The company’s average 2004-2013 P/E is 205 and average EV/Sales for the same period is 7.76. 1,4 4,5 5,0 6,2 3,3 8,1 17,2 16,0 25,2 2005 2006 2007 2008 2009 2010 2011 2012 2013 Salesforce Inc. market cap*, $ billion Success stories in the cloud Total revenue of leading Russian cloud providers do not exceed a few million dollars at present, and Megaplan, one of the market leaders, was valued at a mere $15m in a recent 1C deal. But Russian cloud providers have much to aspire to: their global counterparts now boast billion-dollar market caps, although their revenues 10-12 years ago were those of Russian cloud providers today. In order to appreciate the potential, it is worth briefly retelling the stories of Salesforce and Net Suite, two of the world’s most successful cloud CRM/ERP developers. Salesforce Inc., the world’s leading cloud CRM provider, was founded in 1999. Growth of its revenues and customer base have been rocket- propelled. Company revenue increased by 600 times in 2001-2013, with revenue CAGR amounting to 51%. The number of clients rose from 1500 as of January 31, 2001, to 104,000 by the end of July, 2011. According to Gartner, Salesforce had a 14% share of the world’s CRM market in 2012 (35% of the cloud CRM market). Source: Bloomberg 0 1000 2000 3000 4000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Revenue of Salesforce Inc., $ million -400 -200 0 200 400 600 2006 2007 2008 2009 2010 2011 2012 2013 Salesforce Inc. free cash flow and net income, $ million Free Cash Flow Net Income Sources: Company data, Bloomberg *Market cap figures are given for the financial year ending on January 31. Source: Bloomberg
  22. 22. Net Suite Inc., founded in 1998, is one of the world’s leading developers of cloud solutions for business automation. The company is the world leader by numbers of cloud ERP customers (more than 16,000). The company showed revenue CAGR of 59% in 2002-2012 from $3.1m in 2002 to $308.8m in 2012. Net Suite held an IPO on the NYSE in 2007. Although the stock suffered during the 2008 crisis, its market cap grew by 108% from December 31, 2007, to December 31, 2012. Net Suite’s market cap rose by a further 40.5% in 1H2013 to reach $6.87b. * At year-end. A loss of $51m in 1H2013 was mainly due to $35.5m non-cash expenses in an option programme. The company started generating positive cash flows in 2010, showing FCF of $60m in 1H2013. Average 2007-2012 EV/Sales equals 10.4**. The success of Salesforce and Net Suite reflects high growth rates of the cloud tech market in the US. Russia looks set to emulate these growth rates soon, so investors who make the right choice today can expect substantial gains. We think that at least some of the Russian cloud projects presented below will be winners. **Calculated from EV and Sales as of December 31 of each year. 2,4 0,5 1,0 1,6 2,8 4,9 2007 2008 2009 2010 2011 2012 Net Suite Inc. market cap*, $ billion Source: Bloomberg 0 100 200 300 400 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net Suite Inc. revenue, $ million -60 -40 -20 0 20 40 60 80 2006 2007 2008 2009 2010 2011 2012 6м2013 Net Suite Inc. free cash flow and net income, $ million Net Income Free Cash Flow Source: Bloomberg Source: Bloomberg Success stories in the cloud
  23. 23. Cloud CRM/ERP/SCM: solutions In this chapter, we will take a closer a look at cloud CRM/ERP/SCM providers operating on the Russian market. We contacted a large number of companies, not all of which agreed to share detailed information about their products and business. But, we are confident that the data, which we have collected will prove of use to both venture capitalists and cloud entrepreneurs. The Russian cloud market Small but promising According to expert estimates, Russia’s cloud CRM/ERP/SCM market size was between $10m and $30m in 2012. Market growth rates are expected to be 50-100% a year over the next 3 years. Little competition and high concentration According to market players, the Russian cloud CRM/ERP/SCM segment is characterized by a very low level of competition as most new customers previously used Excel or pen-and-paper book- keeping rather than rival software. Megaplan appears to be the overall market leader with revenues of $5m, or 25% of the market. MoySklad is the leader in the sales and inventory management segment, with revenues of $2m in 2012, while amoCRM is the largest player in cloud CRM for SMEs. Foreign players are also present on the Russian market. According to market participants, the most popular non-Russian solutions include those of Salesforce, Zoho and SugarCRM. However, experts were unable to estimate their sales in Russia, only specifying that their market share is very small. Foreign cloud solutions are generally more expensive than Russian ones and often require lengthy and/or costly deployment procedures. Low customer loyalty Levels of customer loyalty to Russian cloud providers are very low at present. The companies which agreed to share their operational data reported monthly churn rates of 5-7%, while, as Maxim Krasnykh, Director for Russia and CIS at Intel Capital, told us, 30% per year is considered a normal churn for foreign companies. Maxim also points out that Russian cloud companies’ ARPU is 3-5 times as low as that of their US peers. However, acquisition cost is also much lower in Russia: it is made up for after several months of paid usage compared to 6-18 months in the US. We also call attention to the cloud M&A activity of 1C, one of the leading companies on the Russian software market, which acquired 51% of the capital of MoySklad for $1.2m in 2011 and 51% of Megaplan for $7.5m in 2012, thus taking control of 2 out of the 3 emerging market leaders. Key takeouts 1. There is still plenty of room on the market and low entry barriers improve the chances of success for new projects. High market growth rates, low competition levels and low cloud penetration rates mean that new projects can achieve fast growth of revenue and customer base. 2. As the market grows, local cloud providers are likely to face stiff competition from foreign cloud software developers, which can afford to spend more on marketing and adopt aggressive pricing policies to win market share. Low customer loyalty aggravates this risk. 3. The marketing costs that are needed in order to achieve a “critical mass” of customers will rise as cloud CRM/ERP/SCM penetration rates grow. 4. New opportunities for cloud project exits are likely to arise as leading Russian IT companies such as 1C and Diasoft become increasingly interested in SaaS solutions.
  24. 24. Megaplan offers cloud solutions for customer relations, sales, staff collaboration and accounting. Megaplan won Russia’s Soft-2009 Most Promising Startup of the Year Award. Monetization Freemium. A free trial version is offered for 30 days. Monthly subscription is R250-544 per user per month, depending on functionality. The solution with the narrowest functionality, “Collaboration”, includes:  Task and project management  Corporate IM and email  Staff collaboration  CRM The “Sales” solution (from R370 per user per month) includes financial management and an improved CRM system in addition to the above. The more expensive “Business” solution allows the service to be scaled across several offices domestically and overseas. The service was launched commercially in 2008. Team Mikhail Smolyanov, co-founder, CEO Graduated from the Faculty of Mechanics and Mathematics at Moscow State University in 2004. From 2005 to 2006, Mikhail worked as managing director at Eurovision LLC. Since 2010, he has been the development director at StartupIndex. Mikhail Ukolov, co-founder, managing partner Graduated from Moscow State University of Economics, Statistics and Informatics with a major in management in 2004 and completed a PhD there in 2007. From 2001 till 2004, he ran Virtual Art Group studio. Since 2004, he has been a managing partner at Utinet.ru. Competition Megaplan is the leading provider of cloud CRM/ERP/SCM solutions in Russia. According to various expert estimates, its share of the Russian market is between 16% and 25%. Megaplan management estimate the yearly churn at 40%, or 3.33% a month. The customer lifetime value has increased from R10,000 ($400) in 2008 to R40,000 ($1250). Conversion rate 5-15% Monthly churn 3.3% ARPU R1350 ($41) Customer acquisition cost Up to R13,500 ($410) LTV R40,000 ($1250). Sources: Vedomosti, SPARK, Rusbase, RMG estimates Sources: Company data, RMG estimates Rusbase reports that Megaplan received financing of R1m ($31,500) in 2009. According to SPARK, IQ One owned 23.11% of Megaplan’s capital as of December 30, 2009, implying overall company value of $4.3m. On March 29, 2012, 1C, Russia’s leading software developer, announced the acquisition of a 51% share of Megaplan for about $7.5m, valuing the company at $14-16m. 24 Operational records 2009 2012 Sources: Rusbase, SPARK, RMG estimates 4.3 Megaplan valuation in M&A deals, $ million 14-16 Cloud CRM/ERP/SCM: solutions
  25. 25. 2100 4000 6000 2011 2012 2013E Revenues, $ thousand The company’s 12-month revenue as of the end of June 2013 was $5m. Megaplan has some 10,000 clients. We estimate 2012 revenue at $4m. According to Mikhail Smolyanov, revenue grew by 70-90% y-o-y in 2012. Future plans The company plans further expansion in the Russian market. It does not expect to enter foreign markets in the foreseeable future. Project strengths  High brand awareness helps cut marketing costs, attracts larger clients and provides a steady inflow of customers  Rich functionality within a single solution helps to meet the needs of various clients  The team is experienced in project management and capital raising Project weaknesses/risk  Low customer loyalty: a high churn affects customer acquisition costs. Also, the bulk of customers are SMEs and self-employed individuals, who are inherently exposed to substantial financial risks.* 25 Sources: Company data, RMG estimates * These risks are common to most cloud providers Cloud CRM/ERP/SCM: solutions
  26. 26. Cloud CRM/ERP/SCM: solutions MoySklad (“MyWarehouse”) is a cloud solution for sales and inventory management. Its functionality also helps to manage purchases, customer relations, orders and financial transactions. In 2013, MoySklad launched “Accounting Online”, which is a 1C-based online accounting product. Customer categories  Online stores The service enables processing of orders received by various e-stores within a single framework, loading of product data in the Yandex.Market format (.YML), management of courier delivery, including order allocation, route and order list printing, and courier/mail service accounts management.  Wholesale dealers The solution makes it possible to bring together several entities, branches, warehouses and/or sales desks within a single framework without incurring further infrastructure costs.  Physical retailers MoySklad provides a full-scale salesperson’s workplace with functionality ranging from sales registration and refund management to barcode scanning and shift closing. The service is available both online and offline. Integration with a fiscal data recorder is also possible. Monetization Freemium. A fully functional trial version is offered free of charge for 14 days. Subscription fees range from R240 ($7.5) to R6400 ($200) per month. Subscription to Accounting Online costs from R870 ($27) to R2060 ($64) per month. Team Askar Rakhimberdiev, co-founder, CEO. Has a more-than-10-year experience in software development. Askar was previously responsible for SaaS development at Aspect Enterprise Solutions and managed projects at Auriga, one of Russia’s leading IT outsourcing companies. Oleg Alexeyev is responsible for MoySklad’s technical development. Before the start of MoySklad, Oleg was a developer of distributed ERP systems. Dmitry Kabatov, co-founder, development director Has more than 10 years IT experience. Dmitry was in charge of the Moscow office of Exact Software, an ERP vendor, for 5 years. Competition MoySklad is a leader in Russian cloud CRM/ERP/SCM solutions for SMEs. According to expert estimates, the company had 6-10% of the market in 2012. MoySklad’s direct rivals in cloud solutions for sales and inventory management are BigBird and Karkas. However, most new customers are using MoySklad as their first business process automation system. As the market is not saturated, MoySklad does not have to persuade customers to switch from a rival solution. Most customers who buy MoySklad previously used MS Excel for the same purposes. According to Askar Rakhimberdiev, 1C:Sales and Warehouse, a cloud solution offered by 1C, targets larger clients, so it is not a direct rival for MoySklad. Capital invested According to our information, Ambient Sound Investments, an Estonia-based investment holding, acquired about 20% of the company for over $100,000 in 2008, valuing the whole company at about $500,000 at the time. 26
  27. 27. 25000 64000 1500 3700 0 1000 2000 3000 4000 0 20000 40000 60000 80000 2011 2012 Revenue and number of customers Revenue, R thousand Number of customers In 2011, 1C bought out ASI’s share and a part of other investors’ shares in MoySklad for $1.2m (Rusbase estimates). According to SPARK, 1C owns 51% of MoySklad’s capital as of August 2013, implying $2.35m total valuation. So the 1C deal valued MoySklad 3.9 times more highly than the ASI deal. MoySklad launched its service in February 2008 and 100,000 users had registered on the company’s website as of August 2013. Askar Rakhimberdiev admits that customer loyalty is not high, as shown by a churn rate of 5.5% per month. The customer base grew by 140% y-o-y in 2012 and revenues increased by 153%. Future plans Management says that MoySklad has no plans to expand beyond the domestic market. The company expects its revenues and customer base to grow by 70-90% per year over the next few years. Project strengths  Leading market position. Brand awareness helps cut marketing costs and attract larger clients  Successful history of venture capital raising  Strong development team  Broad functionality of the solution Project weaknesses/risks  Low customer loyalty. High churn drives up customer acquisition costs, and most customers are SMEs and sole proprietorships, which are often short of cash*  Low free-to-paid conversion (4%) suggests that potential clients are insufficiently aware of the advantages, which the product offers* Conversion rate 4% Monthly churn 5.5% ARPU R1450 ($45) Customer acquisition cost Up to R8700 ($270) LTV R26,000 ($810) Sources: Company data, RMG estimates Sources: Company data, RMG estimates *These risks are common to most cloud providers 27 2008 2011 Sources: Rusbase, SPARK, RMG estimates 600 MoySklad valuation in M&A deals, $ thousand 2350 Operational and financial records Cloud CRM/ERP/SCM: solutions
  28. 28. 125 500 900 0 500 1000 2011 2012 2013E Revenue, $ thousand amoCRM is a cloud CRM solution with functionality for creation or transfer of a customer database, task management, collection and analysis of customer and employee statistics, as well as bulk SMS and email circulation. The service was founded and is owned by Qsoft, a company with offices in Moscow and the US. amoCRM was launched in April 2010. According to Mikhail Tokovinin, the co-owner of Qsoft, the company has never raised external financing. Monetization Freemium. A free version is available with a restriction on the number of users. Monthly subscription fees range from R600 ($19) to R3000 ($94) depending on the number of users, size of the customer database and number of transactions. Team According to SPARK data, Qsoft was owned by Mikhail Tokovinin and Denis Mitrofanov as of June 20, 2013. Mikhail declined to share any information regarding the amoCRM team. Competition According to experts and company management, amoCRM is the most popular Russian cloud CRM system. We estimate amoCRM’s share of the CRM/ERP/SCM market at 2-3%. The company’s direct rivals include domestic Bitrix24, Asoft and Terrasoft solutions as well as foreign Salesforcem Zoho and SugarCRM systems. Mikhail Tokovinin believes that the level of competition is currently very low, and that the cloud CRM market may grow exponentially (his is the most optimistic estimate, which we encountered). Most of the company’s customers are medium-sized enterprises, but the product is also used by small and large businesses. Operational and financial records We estimate 1000 customers as of late 2012 and 2012 revenue at $400-600,000. According to management, revenues grew by 400% in 2012, implying that the company earned $100-150,000 revenue in 2011. Based on estimated 1500 customers as of mid-2013, we forecast 2013 revenue between $800,000 and $1m. The company has rather high churn, but it has declined since the launch year, when up to 10% of customers quit the service monthly. The company does not provide data about customer acquisition costs and free-to-paid conversion rates. Monthly churn 6-7% ARPU R1000-1500 ($31-47) LTV R15-25,000 ($470- 780) Sources: company data, RMG estimates 28 Future plans Management priorities are integration with other complementing SaaS solutions, such as cloud accounting and collaboration systems. Project strengths Support from Qsoft, one of the leading Russian web integrators with rich experience in SaaS: Qsoft launched the qTrack, amoForms and Shoptus products. Project weaknesses/risks  Narrow functionality We cannot evaluate the team due to insufficient information. Cloud CRM/ERP/SCM: solutions
  29. 29. 200 1 000 2 800 2010 2011 2013E Revenue, $ thousand Moe Delo (“My Business”) is an online accounting solution with some CRM functionality.* The project was launched in 2009 and has been selling since September 2010. In 2010, the company won the Runet Economics and Business Award and was a prize winner in the Google and Forbes Business Project Award. Monetization Freemium. A short free trial period is offered. Subscription fees range from R540 ($17) to R5069 ($158) per month depending on functionality. Team Maxim Yaremko, co-founder, CEO. In 2006, Maxim founded Savadi, a software development company, which he ran until 2010. Sergei Panov, co-founder, chairman of the board of directors. Since 2001, Sergei has headed several publishing houses focused on financial media. Competition Moe Delo is one of Russia’s leading cloud accounting solutions. Its major rivals include 1CFresh, 1C’s online accounting system, SKB Kontur’s cloud solution, and Nebo. Operational and financial records In an interview with the leading Russian business newspaper, Vedomosti, Sergei Panov estimated the company’s customer base at 180,000 users as of late 2011. In 2011, the customer base grew by 700%, and revenues rose by 400%, according to Panov. Forbes estimates Moe Delo’s revenues in 2011 at $1m. Based on the rate of customer base growth, we forecast 2013 revenue at $2.8m. Investments In 2012, Klever Internet Investments Ltd invested $4m in Moe Delo. Based on 2011 revenue of $1m as estimated by Forbes and P/S of 7.0-8.0x, Klever could have acquired around 50% of the company, implying $8m company valuation. Project strengths  High brand awareness  Large customer base facilitates non-accounting service sales Project weaknesses/risks  Market saturation may lead to a slowdown in growth rates 22 500 180 000 500 000 Number of customers 01.01.2011 31.12.2011 31.03.2013 * Although the product is positioned as an online accounting solution, we have included it in this report as we believe that its CRM functionality has much market potential. Sources: Company data, RMG estimates 29 Cloud CRM/ERP/SCM: solutions
  30. 30. Miiix helps online stores to obtain information on their suppliers’ warehouse reserves and prices. The service, launched in August 2012, currently focuses on stores retailing vehicle tires and wheel disks. In 2013, the company opened an ‘order board’ that delivers purchase orders to suppliers, receiving a commission from the supplier equal to 50% of the difference between the order price and the supplier’s minimum price for the item. Monetization Freemium. The free version only includes a search in the inventory database. Over 60% of revenues are generated from commissions on deals through the order board, while 35% are subscription fees; and 5% are one-off payments for other services. Team Sergei Ryabov, co-founder, CEO An Internet entrepreneur with more than 10 years experience. Sergei had a stake in and managed the shopping clubs, funppc.com and elitistclub.com. In 2006, he co-founded a domain name registration firm, ruler-domains.com. A year later, Sergei sold elitistclub.com to a partner and focused on the registration firm, which was sold to a larger rival in 2010. Since 2008, he has launched several e-stores and in 2009, he was part of the team, which launched the recommendations startup, deeep.me. The team transformed into aller-design.ru, a web studio, which was then bought out by a co-founder. In total, Sergei has worked on 10 projects. Dmitry Bereznitsky, co-founder, CTO Dmitry started his Internet entrepreneurship career in 2006, launching affiliate e-stores for Amazon. He is the founder of Mosquito, an automated store promotion service and was one of the co-founders of ruler-domains.com. Later, Dmitry was co- founder and CTO in deeep.me, aller-design.ru, prestigewheels.ru and sportmanya.ru. Competition Potential rivals to Miix (with similar functionality) are MarketMixer.net and Agora B2B (the latter is currently only at the test stage – a beta version has been launched). Analogues on developed markets are tyre24.de, Order Motion and Merchantry. Investments In November 2012, Miiix sold a 15% stake to RSV Venture Partners for $20,000, implying total company valuation of $133.000. In 2013, Miiix won the IT Startup Eurasia 2013 Award and received a $60,000 grant from Microsoft. Operational and financial records ARPU at the end of June 2013 was around $300. Monthly revenue figures show distinct seasonality. 0 50 100 150 200 08/12 09/12 10/12 11/12 12/12 01/13 02/13 03/13 04/13 05/13 06/13 Miiix monthly revenues, R thousand Source: company data 30 Cloud CRM/ERP/SCM: solutions
  31. 31. Growth in the number of online stores operating in Russia will be an obvious driver for growth of Miiix business. Miiix expects R2m ($60,600) revenues in 2013. Project strengths  A team with strong Internet business expertise  High growth potential, provided that the business model is applied to more eCommerce segments and also to offline retail Project weaknesses  Seasonality  Narrow focus: entering new segments may require substantial development and marketing costs 144 new users registered on the Miiix website between August 2012 and June 2013, and the average share of paying users was 24%. The company was unable to provide objective data on customer acquisition costs and average revenue per customer from registration to the present (or until the customer quits). Future plans The founders currently see two priorities for company development: 1. Introducing new services to increase ARPU to $500. As of August 2013, additional services only account for 5% of revenues. 2. Entering new segments. According to Sergei Ryabov, Miiix is planning to launch operations in the sports equipment segment early in September. New segments could accelerate customer base and revenue growth. DataInsight estimates that the car parts segment, to which Miiix is currently limited, accounted for 10% of all online sales of physical goods in Russia in 2012. 7500 10000 16000 25000 32500 39000 2008 2009 2010 2011 2012 2013E Online stores on the Russian Internet 44% 13% 10% 7% 5% 4% 3% 3% 11% Online physical goods sales structure in Russia, 2012 Electronics and appliances Clothing and footwear Auto parts Home and furniture Goods for children Cosmetics and perfumes Books and CDs Foodstuffs Other 25 36 46 73 88 100 109 117 127 133 144 3 10 14 20 22 23 26 30 34 34 35 0 40 80 120 160 08/12 09/12 10/12 11/12 12/12 01/13 02/13 03/13 04/13 05/13 06/13 Cumulative new users Number of registrations on the site Number of customers making first-time payments Source: company data Source: Data Insight Source: InSales 31 Cloud CRM/ERP/SCM: solutions
  32. 32. BigBird is a cloud system for management of sales and inventory with functionality covering:  Sales, purchases and inventory management  Management of several current accounts and cash operations  Create workflow and accounting databases  Document distribution, printing and emailing  Generate management accounts for analysis of business results BigBird is a product of Eteron, a Russian software development company. Monetization Freemium. A free version with restricted functionality is available. The product currently has a single tariff of R590 ($18) per month (if prepaid for a year) or R990 ($31) per month (if prepaid for one month). There is also a free version of the product which will be monetized by showing ads. According to the founders, the project is currently at the stage of creating a customer base. Work on monetization is not yet fully underway, and numbers of paying customers are low. Team Oleg Sidorenkov, co-founder, development director and co-founder of Eteron. In 2004, Oleg set up a franchisee of 1C that deployed, customized and serviced 1C’s managerial accounting software for SMEs. In 2006, he founded Formz.ru, an online form-filling solution. Igor Sidorenkov, project consultant. He previously worked as a programmer for a US-based software developer, Pricedrive. In 2001, Igor was Vice President for system engineering and Head of IT at CarsArrive Network, a startup later sold to Kar Auction Services and ADESA. Igor is currently working as an independent consultant for several IT projects. Competition The product is designed for small enterprises and self-employed individuals. Direct rivals include MoySklad and Karkas. BigBird has a number of distinctive features compared to rivals:  System architecture The kernel of the system is separated from the web interface and interacts with the latter by means of standard protocols, thus enabling use of alternative interfaces and leaving space for integration with other applications  Rich interface The web application’s interface is similar to that of desktop applications and thus is familiar to users. Libraries used to create the interface are developed by a major German hosting provider, which makes the interface more user-friendly and facilitates the development of a mobile version of the solution. Investments In 2011, Eteron, the owner of rights to Formz.ru and BigBird, raised angel investments. The deal value and the share acquired were not disclosed. Cloud CRM/ERP/SCM: solutions
  33. 33. Cloud CRM/ERP/SCM: solutions Future plans According to Oleg and Igor, development priorities include integration with other systems, adding CRM functionality, creating a version for mobile devices, and additional services for organizations such as registration of LLCs and obtaining incorporation certificates. The founders do not rule out entering foreign markets but do not see it as a major priority. Project strengths  Reduction of customer acquisition costs and growth of the customer base can be achieved by cooperation with Formz.ru (a free site providing all types of official templates for business use), which has 140,000 registered users, more than 600,000 visits per month and has provided 50,000 referrals to BigBird in 2013)  The team has rich experience in automation for SMEs and fundraising Project weaknesses/risks  Narrow functionality 33
  34. 34. Conclusion Venture capital market in 2Q2013  The amount of venture capital invested in Russia in 2Q2013 fell by 41.3% q-o-q and by 47.7% y-o- y. The number of VC deals closed fell to 53, compared with 75 in 1Q and 87 in 2Q2012.  We have noticed a significant decline of VC investment in seed/startup companies by private funds. Private funds provided only 13.1% of all venture capital invested in seed-stage deals in 2Q2013 compared with 34% over 4 quarters of 2012 and 44.7% in 4Q2012, and the trend was the same for startups.  IT continued to dominate the venture capital market in 2Q2013, attracting 87% of all venture capital invested in Russia over the period. Market situation and outlook  Russia’s VC market remains non-transparent. Reliable information on deal values and shares of capital acquired is difficult to obtain and venture companies are often unwilling to disclose their financials and operational records. Experts and business leaders we have interviewed are fully aware that an increase in transparency would benefit both investors and entrepreneurs. We are hopeful for a more open market in the future.  We note growing interest from foreign corporate funds in the Russian venture capital market. VC funds founded by the likes of SAP, IBM, 3M are considering investment in Russia.  More large American and European VC funds such as Accel Partners or Bessemer Venture Partners, which have not previously been interested in Russia, are now becoming active on the Russia VC market.  Private VC funds are being set up by founders of Russian projects who have successfully cashed out during IPOs (such as Mail.ru and QIWI) or M&A deals.  The decline in capital invested by private funds in seed/startup companies is likely to continue. Russian and foreign investors are unwilling to assume the large risks associated with these projects. We believe that a major part of seed financing will come from state-backed funds. The future of cloud technologies  According to experts and market leaders, Russia’s cloud tech market will grow faster than IT as a whole, with CAGR of 44% up to 2016.  According to Parallels, almost 50% of SMEs not currently using cloud solutions are going to adopt cloud technologies within 3 years.  Both Russian and foreign investors are interested in Russian cloud startups. We are confident that Russia’s cloud tech market has substantial investment potential.
  35. 35. Acknowledgements We would like to thank the experts, creators of M&A databases and venture entrepreneurs, who have contributed to our Report: Andrei Dovgan Head of General CRM Terrasoft Oleg Fateev Director of Cloud Computing Business Development IBS Holding Vladimir Gabriel Head of Sales Delovaya sreda Dmitry Galperin Director of Investments Runa Capital Victoria Gracheva PR&IR Director iTech Capital Alexander Kotov Co-founder, CEO Venture DataBase Maxim Krasnykh Director for Russia/CIS Intel Capital Demid Kuznetsov Financial Director iTech Capital Evgeny Nikolaev CEO IBS DataFort Mikhail Oreshin Co-founder Russian Cloud Computing Professional Association Victor Osyka Partner Almaz Capital Marusya Podlesnova Co-founder, CEO Rusbase Askar Rakhimberdiev Co-founder, CEO MoySklad Sergei Ryabov Co-founder, CEO Miiix Oleg Sidorenkov Co-founder, Head of Development BigBird Igor Sidorenkov Project consultant BigBird Mikhail Smolyanov Co-founder, CEO Megaplan Alexei Solovyov Managing Director Prostor Capital Mikhail Tokovinin Owner Qsoft
  36. 36. Contact information We are greatly interested in the opinion of our readers, so if you are an investor, a venture entrepreneur or otherwise interested in Russia’s venture capital market, we will be delighted to receive any feedback from you that will help us improve our reports. Please send your feedback to vc@rmg.ru Authors: Arseniy Dabbakh Director, Corporate Finance arseniy.dabbakh@rmg.ru Boris Orlovetsky Analyst boris.orlovetsky@rmg.ru Sergei Pigarev Analyst sergei.pigarev@rmg.ru Andrey Tretelnikov, CFA Analyst andrey.tretelnikov@rmg.ru
  37. 37. Any information and opinions contained in this analytical document (hereinafter – the “Analytical Materials”) are published solely for informational purposes and are not and should not be construed as an offer or a solicitation of an offer to buy or sell any securities or other financial instruments mentioned herein. Any investments in securities or other financial instruments may be related to significant risks, appear inefficient or unacceptable for this or that category of investors. Any decision on investments in the securities and other instruments requires significant experience and knowledge in financial matters, and in issues of evaluation of risks and benefits related to investments in this or that financial instrument. The Analytical Materials may be used by investors in the Russian Federation subject to the laws of the Russian Federation. The Analytical Materials are not addressed to residents of the USA, UK, Canada, Australia, Japan and to investors in other jurisdictions, unless this is permitted to particular investors in special circumstances provided for by the laws of their home jurisdiction. Rye, Man and Gor Securities accepts no liability for use of the Analytical Materials by investors, who are not permitted to do so under the laws of their home jurisdiction. Information has been obtained from reliable sources and any opinions herein are based on sources believed to be reliable, but no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of such information. Any opinions expressed are the opinion of specialists of Rye, Man and Gor Securities and subject to change without notice. Rye, Man and Gor Securities is under no obligation to update or correct any inaccuracies contained in the Analytical Materials. Neither Rye, Man and Gor Securities nor any of its directors, employees, agents, affiliates or licensees accept any liability for any loss or damage arising from use of the Analytical Materials. Investors should assume that Rye, Man and Gor Securities does or seeks to do investment business with any of the companies mentioned herein. Rye, Man and Gor Securities and its directors, employees, agents, affiliates or licensees may, from time to time, have long or short positions in, and buy, sell, make a market or otherwise act as principal or as agents in transactions on securities or other financial instruments related to companies mentioned in the Analytical Materials. The Analytical Materials may not be reproduced, redistributed or any other way used, in whole or in part, without the written permission of Rye, Man and Gor Securities. Copyright © Rye, Man & Gor Securities, 2013 Tel: 7 (495) 258 6262; e-mail: vc@rmg.ru 37

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